If investors’ aversion to risk increased, would the risk premium on a high-beta stock increase by more or less than that on a low-beta stock? Explain.
Answers: If I'm afraid of risk, you'll enjoy to offer me more money (risk premium) to catch me to play. Your beta value is a test of volatility compared to the broad stock market. Higher beta = more volatility = more risk. Assume I can find a 5% return on a risk free investment (10 yr treasury note). To entice me into the stock market (stocks = risk of loss), you own to offer me better than 5%.
Walmart is a low beta stock (current beta -.06). This medium Walmart's share price is actually more stable than the broad souk (e.g. S&P500). So I may accept a 9% return on Walmart (risk premium of 2%).
Google have a beta of 2.4, meaning it's in the order of 1.4 times more volatile than the broad market. My potential for profit and loss is much highly developed. But I can get 5% risk free from treasuries. So why give somebody a lift the risk. Google would have to give a return of about 25% (risk premium of 20%) back I would buy.
More risk requires the promise of more profit.
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Answers: If I'm afraid of risk, you'll enjoy to offer me more money (risk premium) to catch me to play. Your beta value is a test of volatility compared to the broad stock market. Higher beta = more volatility = more risk. Assume I can find a 5% return on a risk free investment (10 yr treasury note). To entice me into the stock market (stocks = risk of loss), you own to offer me better than 5%.
Walmart is a low beta stock (current beta -.06). This medium Walmart's share price is actually more stable than the broad souk (e.g. S&P500). So I may accept a 9% return on Walmart (risk premium of 2%).
Google have a beta of 2.4, meaning it's in the order of 1.4 times more volatile than the broad market. My potential for profit and loss is much highly developed. But I can get 5% risk free from treasuries. So why give somebody a lift the risk. Google would have to give a return of about 25% (risk premium of 20%) back I would buy.
More risk requires the promise of more profit.
Resolved Questions: